Just as the country's largest joint venture Ukrainian-Korean AvtoZAZ-Daewoo was starting to rev up, the government announced last month that it will loosen its grip on used car imports – a move that is sure to hurt the venture's hopes for rising sales.
Though the decision is bound to please the European Union, it has already drawn ire from the troubled carmaker, which claims that the resolution violates the terms of an agreement it made with the Ukrainian government in 1997.
The government passed a resolution on March 29 raising the maximum age of second-hand cars allowed to be imported into Ukraine from five years to eight years. The resolution also will cancel the minimum customs value for imported cars. Customs and excise duties on imported cars are calculated on the basis of an automobile's minimum customs value, which prior to the resolution was $5,000.
The government cited a need to comply with the EU requirements and a dramatic decline in budget contributions from automobile imports as the key reasons behind the decision.
According Andry Starostyn, spokesman for the State Customs Service, about 52,000 cars were imported last year, down from about 185,000 in 1997. Starostyn said the agency raised Hr 149 million in taxes from car imports last year, three times less than the Hr 462 million earned in 1997.
The move is likely to please the EU, which had complained about a series of protectionist measures passed in 1997 that were advantageous to Avtozaz-Daewoo. Those measures included the ban on imports older than five years and the $5,000 minimum customs value.
At that time the EU balked at the measures, calling them 'discriminatory fiscal advantages to the Korean investor.' Ever since, the EU attempted to pressure Ukraine to abandon the practices.
Last month's resolution is good news for thousands of used car traders who were put out of business as prices rose significantly in the wake of the protectionist measures.
Avtozaz-Daewoo, however, criticized the decision, saying the Ukraine was violating the terms of the deal between the government and the investor.
'By making this decision Ukraine breaks the agreement unilaterally,' said Yevhen Kosachev, spokesman for Avtozaz-Daewoo. Kosachev said that tax breaks were promised to any investor would pump at least $150 million in Ukraine's automobile industry.
The government decision came at a time when the joint venture was just starting to become optimistic about its future. Sales improved significantly at the end of the last year and the trend has continued this year, Kosachev said.
In December alone, the car-maker sold 4,195 vehicles, about half of the total number sold in the first 11 months of 1999.
Still sales aren't up to expectations, and Avtozaz-Daewoo blames that on the government for not properly enforcing the restrictions on cheap car imports. According to Kosachev's data, only about 80,000 new vehicles were imported into Ukraine last year – out of more than 300,000 cars brought in the country.
'And now the government is opening the locks even wider,' he said.
He said now that the minimum customs value of a car is abolished, traders will claim they bought a vehicle at a symbolic price and pay much lower taxes – the practice that was widespread before the regulation was introduced in 1997.
Kosachev also said taxes on imported cars are not high enough to protect the domestic manufacturer. The tax on imports is slightly more than 20 percent of the vehicle's value compared to almost 70 percent in neighboring Poland.
Kosachev said the Avtozaz-Daewoo will ask the government to consider a package of measures that would neither violate the EU requirements nor 'kill Ukraine's embryonic automobile industry.'
